Decoding the rise of Tejas Networks - an optical-networking product company that listed in June

Tejas began by building optical-networking equipment from India for the world for better margins. Seventeen years on, chief executive Sanjay Nayak’s team is ready for the high-speed networks opportunity at home.

In 2002, Gururaj 'Desh' Deshpande sat with the founders of Tejas Networks at The Oberoi in Bangalore. The optical-networking company was in its second year since inception, and close to its second round of funding.

An optical network uses optical fibre cables to convert data as light pulses between sender and receiver nodes in communication networks. Serial entrepreneur Deshpande had hit pay dirt in the US with the initial public offer (IPO) of his third venture, Sycamore Networks, on the NASDAQ in 1999.

Sycamore made optical switches and software that powered telecom carrier networks in the US, where demand for bandwidth was surging. Its market cap had peaked at more than $40 billion during the dotcom boom.

At the 2002 meeting, Deshpande had a fundamental question for the founders: do you want to make Tejas Networks part of Sycamore, which was already an investor? Or do you want to build it out as a company in India that can stand on its own feet?

The three founders, all first-generation entrepreneurs, chose the latter. Kumar N Sivarajan had been an associate professor at the Indian Institute of Science, while Sanjay Nayak and Arnob Roy had been senior software engineers at Synopsis, an electronic design automation company.

The founders' decision would withstand the financial meltdown in the US -- but which would hurt their chance of raising venture capital thereafter -- the 2G telecom scam in India, among several adversities before the IPO last month on the Bombay Stock Exchange. In the process, Tejas Networks has also become India’s first professionally-managed company with no designated promoter group.

The godfather

In Tejas, Deshpande - chairman until 2016 - had envisaged an opportunity to build a telecom-equipment company in India that can help companies like Siemens and Lucent in the West source optical-networking products at better margins. Huawei was giving companies in the west a run for their money, demonstrating efficiencies at scale from China. India had the potential to generate high gross margins, but was untested as a tech product supplier.

"It occurred to me how there is so much talent in India, but it did not have the culture of product companies," Deshpande recalls. The product business is a gamble. "You have to see where the market is going to be a couple of years from now, and you invest in the hope that the product will be right in the future."

By April 2000, he had assembled the founding team of Tejas with that objective. Between himself, Sycamore and ASG Omni, they invested Rs 21 crore in Tejas later that year. The founders had put together a 15-member team. The founders and employees held a 50% stake in the company at the outset, and the balance resided with the investors.

Given that the founders were inexperienced in product development, they began by designing technologies for Sycamore—outsourcing engagements — while also installing and building telecom networks globally.

Venture capital (VC) investors viewed Tejas Networks sceptically at the time. "It was a hard bet to take," says one of them who saw Nayak's business plan in 2000. Huawei, the investor observed, which was growing fast in the China market was preferred by its government. (In the mid-90s, it had won a key contract to build the first national telecommunications network.)

But India was the opposite—a free market, where startups like Orion Tele Equipments or Tejas had to compete with global giants like Cisco and Huawei even if they won contracts from BSNL. "Where the Chinese shook hands with their local vendor to build out, our government had blindly opened up the market to global players," he says.

To counter global competition, the founders sought to focus on converting hardware solutions into "software-defined hardware". With that philosophy, Tejas could design optical fibre products at an even lower cost, says an investor, who requested anonymity and whose venture fund backed the startup in 2002.

"With Kumar (Sivarajan), they could design and produce backend optical gear for telecom companies at a fairly low R&D cost, compared to their global competitors," he explains, adding that the proof would be higher gross margins without reducing R&D spends in absolute numbers. This was possible in India because of its abundant tech talent.

What Tejas had to do was also demonstrate faster go-to-market. Nayak was vital for this. The investor whose VC fund backed Tejas says, "Sanjay is a great sales guy, and a great CEO because he has also shown the ability to drive technology and engineering people."

Chief technology officer (CTO) Sivarajan had the optical networking expertise, proof of which was a 1998 textbook. The first edition of 'Optical Networks: A Practical Perspective', which he co-authored with Rajiv Ramaswami, was selling fast in 1999. There had been one written by Paul Green, former head of IBM, who had been a mentor to Sivarajan when he worked there.

"But our book was written as a university textbook, and popular at optical networking companies," he recalls. It would gross 25,000 copies by 2001 (there have been subsequent reprints since), some of which found their way into Sycamore’s engineering team in the US.

"From a customer standpoint, our products have flexibility-and the time-to-market is shorter. They don't have to wait for a new chip or design a new board/hardware," says Sanjay Nayak.The other two founders, who had known each other when working in Cadence Design Systems and Synopsys in the US, would bring in the software design prowess. Nayak, now 52, hails from Raipur in Chhattisgarh. Before he co-founded Tejas, he had told Deshpande upfront that he was "not a telecom industry guy, and has no background in optical networking."But the two agreed on Sivarajan's expertise in optical networking. The way forward was to hire extremely smart, passionate, motivated, and ethically strong people. "Intrinsically, if the person is willing to learn, he or she can pick up whatever has to be done in technology," says Nayak.

The solution

The engineering team at Tejas Networks, headed by Roy, was developing technologies for programmable silicon chips, so that clients' hardware could be upgraded or new features built upon it, without overhauling the equipment.

They call the innovation 'software-defined hardware', where the hardware itself becomes programmable. "It helped us transition products and solutions as applications moved from voice to data," says Roy, 53. "As new standards evolve, we can be quick to market by reprograming the hardware, instead of operators waiting for standard chips to come in the market."

"We re-program the chip itself," Nayak says. "We own the IPR for the chips which, instead of a fixed function from the factory, are more like blank pieces of silicon on which we can write a software programme. From a customer standpoint, our products have flexibility—and the time-to-market is shorter. They don't have to wait for a new chip or design a new board/hardware. In the field, people can upgrade," Nayak explains.

The big breakthrough came when telecom and data networking equipment maker Nortel noticed Tejas Neworks. In the local market, BSNL had been a customer. "We have picked the right areas," the CTO says. Although Nortel itself shut shop in 2009, Tejas worked with networking-equipment makers like Ciena and NEC and supplied products to them.

Over six rounds before the IPO, Tejas had raised Rs 470 crore (less than $75 million) in venture capital funding as it sharpened its product development prowess.

Two-thirds of Tejas' Rs 628-crore revenue in 2015-16 came from the local market, which has been speeding up on the information highway since 2015. In other words, data consumption among mobile users is growing in India. This is the wave that Tejas wants to capitalise on because the mobile-service providers or telecom operators have to upgrade their networks to cope with rising demand.

Telecom operators like Airtel and BSNL buy equipment while building networks to provide their services. Nayak explains how the programmable architecture helps them: "If they brought our products in 2014, 80% of the revenues was coming from voice. But they knew voice will become a minority because of data or video content." The clients need to upgrade the software in it to have wider pipes for data.

The market

From Tejas' standpoint, it is like a Lego set with their available IPs. "We put it together to create a set," Nayak adds. In China, telecom equipment makers like Huawei and ZTE had built high-capacity data networks for their market even as they focused on voice. Here, the plumbing of the networks is still playing out, even as Airtel and Reliance Jio compete for 4G users. While China spawned an entire ecosystem in manufacturing and electronics, Nayak reckons the opportunity in India is because of the local market and its software ecosystem.

The government has embarked on the BharatNet project to lay optical fibre cables. It is pumping in Rs 10,000 crore in 2017-18 under this, with fibre laid out already in 1,55,000 km. "If Digital India has got to be a reality, only half of India can be connected by private telcos and on data," Nayak says, adding that the government has earmarked Rs 45,000-crore for BharatNet over multiple phases.

V Balakrishnan, non-executive chairman of Tejas Networks, says it will take time for the public markets to see the software-product company in the middle of the data story playing out. "It tends to be seen as a telco player, but is a made-in-India software story in the product and technology space for the telecom industry, competing with global companies globally and in India," adds Balakrishnan, a board member since November 2009.

Tejas Networks may well be a harbinger of software companies that can list on the Indian stock market once they begin to generate cash and when VC funds want to show exits. "In India, when a public issue happens, the regulator wants to identify a promoter who can be held responsible if something goes wrong," says Balakrishan, former CFO of Infosys. "But, globally, the management is liable for running the company."

In the run-up to its IPO this year, Tejas' management and directors explained to Securities and Exchange Board of India (SEBI) officials that it is an entrepreneur-driven company. "My sense is we are going to see many more professionally-managed companies. This is only the beginning," says Amit Tandon, managing director of Institutional Investor Advisory Services.